Topic: Deflationary currency? Really? (Read 8694 times)

So pizza should still cost 10kBTC?

If anyone is interested in contributing to alternative to Bitcoin, check out #Carrot (#Carrot-dev for development) on Freenode and maybe come help with development.  See http://weusecarrots.com/ as to why Carrot is better than Bitcoin.  Currently, no code is available.

I think you might be right on the trend.

But remember the quote: "Man does not live on bread alone" does not imply that bread is not needed, so no matter how much inclination there is toward the spiritual, you must still acquire the "Bread".

You might be very intelligent, but it is our experience that most of what people believe is true about "money" is wrong.  Much of it is counterintuitive.

For example; in a literal sense, I'd be willing to wager that you have never (directly) used real money to buy anything, and may not have ever even touched it.

US $, Euros, Yen; none of these things are money.  They are currencies, as is Bitcoin.

Agreed, I think you are onto something. Money is just a transitory system to make "Bartering" more efficient. The real value is not in the transitory money but in the resources acquired with it.  Even with a single monetary system, the value of the single system would differ based on geology and closeness to the resources being sought. So a single monetary system would change its value by location.

I.E. $5 dollars for milk in New York, $3 for milk in Iowa.

Even with multiple currencies, location matters in the value of the monetary system based on available resources.

Gold is just the use of a Resource as a monetary system to simplify bartering. So it will always hold an intrinsic value.

Granted, because BitCoin is in fact a construct (like math, infinity, etc...) there is no end to its divisibility, unlike Gold, Silver, etc...

I may be wrong but my calculations put it at 21 Quadrillion not 210, but I did not recheck my math.

Let me ask though, when Egypt turned off the internet, what would the value of the BitCoin be, if you were holding them as an Egyptian?

What would the Value of Gold be if you were holding that as an Egyptian?

BitCoin will always hold a transitory value, but will be quickly converted into a physical one. Constructs are just that, Constructs. They are important to use, but hold no value In Real Life.

People use Math, but don't hold onto it after it is used to accomplish something. It is used to accomplish something and then discarded for what it was used to attain. Once the problem is solved, it is of no use to re-solve the problem.

Prices always change. No currency manipulation saves you from changing your price list when bananas double in price relative to potatoes while potatoes drop 20% relative to pencils, as happens all the time.

Any good or service that must be priced at or near the Planck limit is by definition too cheap to meter.

Not talking here about stability of an economy as such.

The stability I have in mind is price stability.

And if price stability can be attained by relatively simple means, why prefer eternally sliding prices until one day we (might) run into the physical limit where prices can no longer slide because they can't be expressed, as the unit has been subdivided by too many decimals?

I suppose you mean to compare stability (of a currency's value) with deflationary development (of that currency's value). They do not really have anything to do with economic growth as such.

To answer the question, as I understand it, stability of a currency (in relation to the goods it buys)

- avoids continual change of prices of goods as expressed in a currency (think of having to change a price list frequently).

- simplifies comparative analysis of economic activity over time (think balance sheets).

- promotes public confidence in the currency.

What is really best in a currency is predictability.  The undesirable characteristics of deflation or inflation have to do with their unpredictable nature, and their magnitude.  Either condition, in moderation, isn't really a problem.  Bitcoin will be very stable in the future, because it's monetary base is entirely predictable out to decades.  While the economy that it represents isn't nearly as stable as the monetary base, once the economy grows to something comparable to Paypal's, the voltility of the spot price will dampen on it's own.  Even modern fiat currencies are unstable compared to one another, and float constantly on foreign currency exchanges.  This is not really a problem.  Bitcoin is actually inflating the monetary base at a rapid rate, running just under 50% APR right now, but will drop over the next two years to about 6.25% APR just after the drop in the block reward around Jan 2013.  The rising value of a bitcoin over the past several months is a reflection of the rapid growth of the economy. (i.e. more people are getting into Bitcoin, and want a starting sum)  We can see the effects of the changing economic size because the economy is still very small, but as the tech matures, which I predict will occur between 2013 and 2015, the economic growth rate will start to experience deminishing rates of ongoing growth.  And even if it doesn't, the effects of the change in economic size will be dampened by it's much greater size.  All things considered, the trade value of a bitcoin, as expressed in another currency or gold, silver, whatever; will settle down to something much more akin to the relative trade values of fiat currencies on the forex.

But as mining decreases, so does difficulty. The most recent re-targeting saw a decrease in difficulty, because mining had decreased following the previous re-targeting.

Why is stability is a good thing compared to deflationary economic growth?

Deflationary, inflationary, both are undesirable in a currency.

Can't we talk about having a STABLE currency, and what it would take to keep a currency reasonably stable?

Prices, ideally, should neither increase, nor should they decrease. The ideal for any currency is stability.

Bitcoin is a great step forward in the direction of having a stable currency, but it does not seem that its creation algorithm is directed towards obtaining stability. We will have gradually increasing difficulty of mining, until a few years from now, mining will practically come to a halt.

Now if bitcoin were to serve a substantially stable market, meaning there is a community of bitcoin users that does not either substantially increase in numbers nor decrease, the currency could be said to be stable in the long term.

I do have a feeling though, that the long term intention of the creators and the early adopters of bitcoin is to expand the user base to hundreds of millions, perhaps even to billions of users.

Since stability of a currency is a function of demand (user base) and availability (fixed in our case after the target amount of bitcoins programmed by its creator has been reached) in a long term view, this means that bitcoin will very likely be a deflationary currency, i.e. that prices, as expressed in bitcoin, will be continually falling, as the user base grows.

For stability, the target amount of bitcoins should be ajustable - preferably by some automatism - to follow the growth of the user base.

@Steve

I think the idea is that the number of miners, and thus the difficulty, are related to the market price of Bitcoins. As the price rises, the number of miners increases, which increases the difficulty. As the price falls, the number of miners decrease, which decreases the difficulty.

How do you arrive at the conclusion that mining difficulty will always follow price based on the fact that the control mechanism operates like a PI controller?  I know that some have mined the data (pun intended) to show that this might indeed have been the case so far, but what is the connection between this assertion and the PI controller aspect of the difficulty setting?  The network is adjusting the difficulty to account for increases or decreases in the rate of block creation in order to target a specific rate of block creation (one every 10 minutes), but the network doesn't care about the market value of bitcoins.

With bitcoin, there is a more-or-less constant overall rate of mining new coins (per individual miner, the rate is dependent on the number of fellow miners, but overall, the rate is constant)...this is different from gold in the sense that more people mining gold yields higher rates of overall gold production and fewer miners yields lower rates of production overall.  I'm not sure what difference this makes.  It may mean that since the overall rate of production doesn't vary with the price (as it does with gold), the mining activity doesn't have any natural moderating affects on bitcoin price volatility.  As the price of bitcoin falls, the reduction in miners doesn't reduce the net new bitcoins being introduced.  Similarly, as the price rises, the increase in miners doesn't increase the rate of new bitcoins indroduced.  In this respect, I think it is different from gold mining.  I wonder whether it would have been better to have made the reward for finding a block to vary with the difficulty (having a higher reward when difficulty is higher, and lower when it's lower) and have the ratio of reward to difficultly decline toward zero over time.  This would mean that you wouldn't have a fixed upper bound on the total number of bitcoins produced, but mining activity might have a more moderating affect on the price of bitcoins.

I understand your point-of-view to a certain respect, certainly.

However regarding the early Gold rushers, what you find is that the constraint of unearthing Gold was physically limited. For example, if 100 people mined Gold in the early days, just because 3 people mine is 1000 years later, it doesn't increase their chance of finding gold.

However with BitCoin the frequency of unearthing fresh BitCoins is dependant on the amount of people mining for it. More people, less BitCoins distributed, less people, more BitCoins distributed. Of course, this is slowly decreasing every four years anyhow, I'm just saying that within the four years, it is down to the whim of the network.

Technically the dollar is Divisible too.

The only problem with losing bitcoins is causing deflation, in which the supply is reduced and 1BTC would be worth more of another currency. With the slashdot effect, a massive deflation caused by demand happened and bitcoins raised in USD significantly. The difficulty also was raised which is making it harder/limiting the supply that is introduced as well. The difficulty should resolve itself and the market will decide if the current price remains stable or inflation will occur due to lack of demand. However whatever happens is exactly how economics work. It might even rise in price due to dollar inflation or a consistent amount of demand.


However the supply of Bitcoins are still in an inflation state, in which the supply is increasing. During this period the project will either fail or become a success. If it does become a success, the long period of time it takes for bitcoins to max out will also show signs of the amount being lost per year going down to a minor percentage, in which any significant deflation of the currency due to reduced supply would take potentially years to cause an issue.

And they are divisible, anyway. The total amount is irrelevant. Even if it did approach zero it would never reach exactly zero and everything would work fine.